The AI barons call time on the bubble

In a briefing to reporters last week, Sam Altman, the founder of ChatGPT maker OpenAI, mused that the valuations of AI companies were being driven way too high. “When bubbles happen, smart people get overexcited about a kernel of truth,” he said. “Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes.” That matters. Altman is the poster boy for the AI boom. ChatGPT has become by far the best-known brand in the emerging industry. Earlier this year it raised another $40 billion in funding, at a valuation of $300 billion, more than double the size of the UK’s largest firm and the largest sum ever raised by a private technology company.

Altman is not alone. Earlier this year, the chairman of China’s tech giant Alibaba warned that the explosive growth in AI data centres meant supply would very soon start to outstrip demand. Meanwhile, it emerged last month that Meta, the owner of Facebook, Instagram and WhatsApp, has frozen hiring in its AI unit, hardly a sign of confidence. We might expect the firms with fund-raising rounds and stock valuations riding the boom to be cheering it all the way. Instead, they are starting to caution that it is reaching dangerous territory.

They have a point. “The difference between the IT bubble in the 1990s and the AI bubble today is that the top 10 companies in the S&P 500 today are more overvalued than they were in the 1990s,” warned Torsten Slok, chief economist of asset management firm Apollo, in a note to investors over the summer. It is not just private companies such as OpenAI, or Anthropic, now worth $170 billion, or Elon Musk’s xAI, now worth $50 billion. Chipmaker Nvidia has become the biggest company in the world, with a value of more than $4 trillion, on the back of booming demand for the semiconductors that power smart chatbots. Firms such as Microsoft and, indeed, Meta, with a stake in the industry, have soared to record highs. There is a lot of hype, and investors have been piling into any company that has a stake in the boom. Indeed, the gains in the stock market this year have been almost entirely driven by AI. Strip that out, and all the major indices would be completely flat.

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Why would AI barons warn of a bubble?

The AI barons may have an eye on their costs when they caution that it can’t last. Salaries for a small number of AI engineers have been soaring, with reports that Meta, for example, has paid up to $100 million in salary and stock options for top researchers. They may hope they can bring that under control by warning of a bubble. Likewise, they may be hoping to get some of their backers to take a more realistic view of the value of some of the leading companies, so they are not disappointed if they turn out to be worth less than they thought. If the bubble does burst, a lot of good companies will get caught up in the storm.

If AI proves to be anything like the internet when it first emerged in the late 1990s, we will see huge amounts of capital poured into the industry, with valuations soaring, followed by a massive collapse, and the slow emergence of a more durable industry of lasting significance. But the good companies get caught up in that collapse just as much as the bad ones. Amazon’s share price fell by 90% when the dotcom bubble burst and only survived with a round of ruthless cost-cutting. Shares in Apple fell from $150 to just $13, but it recovered to become one of the biggest companies in the world. Many other companies disappeared completely, despite huge backing from investors: Pets.com, for example, despite an $80 million IPO, and Webvan, despite $800 million of investment. Perhaps they would have turned into big businesses if it weren’t for the crash.

Any company that is not yet financially self-sufficient could easily get destroyed. Even a giant such as Meta is vulnerable. AI may well be a bubble. Many of the valuations look insane, and it’s hard to believe profits will ever be substantial enough to justify them. Even so, it is very risky for the leaders of the industry to call that out. If the bubble bursts, things will get out of control very quickly, and it will take down many good businesses along with the flimsy ones. The AI tycoons may end up as the authors of their own demise.

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